When government spending G exceeds tax revenue T, public saving, written T - G, is negative.
Missing Word
negative
Public saving is tax revenue minus government spending, so it falls below zero whenever the government runs a budget deficit. A negative value means the government is borrowing rather than supplying funds.
Category: Saving and Investment Identity
Question 2
An equation such as S + (M - X) = I + (G - T), which holds true by definition rather than as a prediction, is called an identity.
Missing Word
identity
An identity is true by definition, because it records that the quantity of financial capital supplied equals the quantity demanded. Any change in one of its terms must be offset by a change in at least one other.
Category: Saving and Investment Identity
Question 3
In the trade deficit term M - X, the letter X stands for the value of a country's exports.
Missing Word
exports
Exports are goods and services sold to buyers in other countries. When they fall short of what the country buys from abroad, the gap is a trade deficit matched by an inflow of foreign financial capital.
Category: Saving and Investment Identity
Question 4
Business spending on new factories, machinery, and equipment is what economists call investment.
Missing Word
investment
In macroeconomics, investment means spending on new physical capital such as buildings and equipment, not buying stocks or bonds. It is the I in the national saving and investment identity, and it is what government borrowing can crowd out.
Category: Saving and Investment Identity
Question 5
When a tax cut raises total spending, part of the extra spending goes to goods produced abroad, so the country's imports rise and its trade deficit widens.
Missing Word
imports
Imports are goods and services bought from other countries. Because some additional consumer spending flows to foreign products, an expansionary budget deficit can enlarge the trade deficit.
Category: Twin Deficits
Question 6
When foreign investors buy a country's government bonds, they must first buy its currency, so the currency rises in value, a change called appreciation.
Missing Word
appreciation
Appreciation is an increase in a currency's value relative to other currencies. A stronger currency makes the country's goods more expensive abroad, which can widen its trade deficit.
Category: Twin Deficits
Question 7
The total amount a government owes from all of its past borrowing that it has not yet repaid is called the national debt.
Missing Word
debt
The national debt is the accumulated stock of government borrowing, while a deficit is the gap between spending and taxes in a single year. When debt grows much faster than GDP, interest payments take a larger share of the budget and lenders may begin to doubt repayment.
Category: Twin Deficits
Question 8
A larger government budget deficit shifts the demand curve for financial capital to the right, which raises the equilibrium interest rate.
Missing Word
demand
Government borrowing adds to the quantity of financial capital demanded at every interest rate, so the demand curve shifts right. The higher equilibrium interest rate discourages some private borrowing, which is the mechanism behind crowding out.
Category: Crowding Out and Growth
Question 9
When a government fails to make the interest and principal payments it promised to its lenders, it is said to be in default.
Missing Word
default
A default occurs when a borrower does not repay interest or principal as promised. Several countries with large deficits have defaulted, which damages their ability to borrow in the future.
Category: Twin Deficits
Question 10
A government that owes a great deal may be tempted to reduce the real value of what it owes by allowing higher inflation.
Missing Word
inflation
Inflation is a sustained rise in the overall price level, which shrinks the real value of debts fixed in nominal terms. Using it this way erodes savers' wealth and confidence in the government.
Category: Crowding Out and Growth
Question 11
Under Ricardian equivalence, households answer a larger budget deficit by saving more, which shifts the supply curve of financial capital to the right.
Missing Word
supply
Private saving is part of the supply of financial capital, so more household saving shifts the supply curve right. In the full Ricardian case this offsets the government's added borrowing, leaving the interest rate and private investment unchanged; evidence suggests the offset is only partial.
Category: Ricardian Equivalence
Question 12
If households expect a larger deficit today to mean higher future taxes, they may raise their saving now to prepare.
Missing Word
taxes
Government borrowing must eventually be repaid, which implies higher taxes later. Households that anticipate those taxes save more today, which is the reasoning behind Ricardian equivalence.
Category: Ricardian Equivalence
Question 13
About half of what businesses spend each year on new capital goods simply replaces equipment and buildings that have worn out or become obsolete, a loss of capital value called depreciation.
Missing Word
depreciation
Depreciation is the decline in the value of capital as it wears out or becomes outdated. Because so much investment only offsets it, net new investment is much smaller than gross investment, so even a modest deficit can crowd out a large share of it.
Category: Crowding Out and Growth
Question 14
Government-built roads, bridges, seaports, and water and sewer systems make up the public physical capital known as infrastructure.
Missing Word
infrastructure
Infrastructure is the basic physical capital that supports economic activity. Reliable transportation, water, and power systems can raise the output of private firms.
Category: Public Investment
Question 15
Reliable roads and electricity raise the amount of output each worker can produce, which economists call productivity.
Missing Word
productivity
Productivity is output per worker or per hour worked, and it is the main driver of long-run growth in living standards. Public physical capital, human capital, and new technology can all raise it.
Category: Public Investment